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Article Germany: Federal Fiscal Court Holds Cryptocurrency Transactions Subject to Income Tax

In a decision published on February 28, 2023, the German Federal Fiscal Court (Bundesfinanzhof, BFH) held that profits gained from cryptocurrency (currency token) transactions within the one-year speculation period are taxable as private sales transactions within the meaning of section 23, paragraph 1, sentence 1, number 2 of the German Income Tax Act (Einkommensteuergesetz, EStG). It stated that virtual currencies in the form of currency tokens can be classified as “other economic assets.” In the opinion of the BFH, they are acquired when they are exchanged for euros, a foreign currency, or other virtual currencies; sold when they are converted back into euros or a foreign currency; or exchanged for another currency token.

Facts of the Case

Between 2014 and 2016, the plaintiff acquired cryptocurrencies (currency tokens), in particular BTC, in the course of 17 transactions on the trading platform “bitcoin.de.” The public and private keys were saved to his wallet. In January 2017, the plaintiff owned 24.75825 BTC worth 22,585.96 euros (about US$24,026.30). During 2017, he exchanged his BTC for the cryptocurrency ETH, exchanged part of his ETH for the cryptocurrency XMR, and converted part of his XMR back to BTC, resulting in a total profit of 3.4 million euros (about US$3.6 million). (Decision paras. 2, 3.)

In his joint tax return for the year 2017, the plaintiff and his wife declared a total of 3.4 million euros as profits from a private sales transaction within the meaning of section 22, number 2 and section 23, paragraph 1, sentence 1, number 2 of the German Income Tax Act. The tax office taxed the profits from the sale of the currency token in 2017, which the plaintiff disputed. He filed a lawsuit against the decision of the tax office. In his opinion, the profits were not subject to income tax because currency tokens are just chains of digital signatures that are recorded on blockchains; they are not transferred but are sent by the wallet owner. Furthermore, he contended that there is a structural enforcement deficit because the individual characteristics of the different cryptocurrencies influence the traceability of transactions and therefore the enforceability of tax rules. The fiscal court of Cologne (Finanzgericht Köln) found in favor of the defendant. The plaintiff appealed the decision on points of law to the Federal Fiscal Court. (Decision paras. 4–9.)

Decision

The Federal Fiscal Court dismissed the plaintiff’s appeal and upheld the decision of the lower court. Section 23, paragraph 1, sentence 1, number 2 of the German Income Tax Act provides that private sales transactions are sales transactions of other economic assets for which the period between acquisition and sale is less than one year. It held that the currency tokens that the plaintiff acquired, exchanged, and resold are “economic assets” within the meaning of that provision. In the opinion of the Federal Fiscal Court, the term “economic asset” must be broadly defined. It includes, in addition to goods and rights, actual conditions, concrete possibilities, and economic benefits for which the purchaser is willing to pay and that can be assessed according to commercial use. The currency tokens BTH, ETH, and XMR are digital assets. They have in common that they are accepted as a means of payment. Even though they cannot be classified as “money” or “electronic money,” they are individually transferable and exchangeable and can be divided into smaller subunits. They are traded on specialized crypto exchanges and have a current market value. Furthermore, they are structurally similar to foreign currencies. Profits gained and losses incurred from buying and selling or exchanging currency tokens during the one-year speculation period are therefore subject to taxation, in the opinion of the court. (Paras. 21, 23, 26–30, 36.)

The Federal Fiscal Court also ruled that there is no structural enforcement deficit that would make the taxation unconstitutional. In the opinion of the court, there are neither contrary and inefficient rules with regard to levying taxes nor indications that the tax authorities are not able to determine and record profits and losses from cryptocurrency transactions. Tax authorities may submit collective information requests to cryptocurrency trading platforms and refer to the OECD Crypto-Asset Reporting Framework. The fact that there might be some individuals who are able to evade taxation despite all efforts of the tax authorities does not constitute a structural enforcement deficit. (Paras. 48–53.)

Jenny Gesley, Law Library of Congress
March 21, 2023

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Gesley, Jenny. Germany: Federal Fiscal Court Holds Cryptocurrency Transactions Subject to Income Tax. 2023. Web Page. https://www.loc.gov/item/global-legal-monitor/2023-03-20/germany-federal-fiscal-court-holds-cryptocurrency-transactions-subject-to-income-tax/.

APA citation style:

Gesley, J. (2023) Germany: Federal Fiscal Court Holds Cryptocurrency Transactions Subject to Income Tax. [Web Page] Retrieved from the Library of Congress, https://www.loc.gov/item/global-legal-monitor/2023-03-20/germany-federal-fiscal-court-holds-cryptocurrency-transactions-subject-to-income-tax/.

MLA citation style:

Gesley, Jenny. Germany: Federal Fiscal Court Holds Cryptocurrency Transactions Subject to Income Tax. 2023. Web Page. Retrieved from the Library of Congress, <www.loc.gov/item/global-legal-monitor/2023-03-20/germany-federal-fiscal-court-holds-cryptocurrency-transactions-subject-to-income-tax/>.